1984 (9) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of interest levied u/s 139 and u/s 215 under section 37 of the Income-tax Act, 1961.
2. Interpretation of interest as compensatory or penal in nature.
3. Applicability of section 80V for the assessment year 1972-73.

Issue 1: Deductibility of Interest Levied u/s 139 and u/s 215 under Section 37 of the Income-tax Act, 1961

The assessee, a limited company, claimed a deduction of Rs. 1,15,809, which included interest levied u/s 139 (Rs. 11,470) and u/s 215 (Rs. 1,04,339), under section 37 of the Income-tax Act, 1961. The Income-tax Appellate Tribunal rejected this claim, following the judgment in CIT v. Mahalakshmi Sugar Mills Ltd. [1972] 85 ITR 320. The court held that the interest was not paid in respect of capital borrowed for business purposes, and thus, not allowable under section 37.

Issue 2: Interpretation of Interest as Compensatory or Penal in Nature

The assessee argued that interest is compensation for the use of money and should be deductible since the unpaid tax amount was used for business purposes. Reference was made to the Supreme Court's judgment in Associated Cement Co. Ltd. v. Commercial Tax Officer [1981] 48 STC 466, where interest was deemed compensatory. However, the court distinguished this case, noting that the Supreme Court's observations were made in a different context and did not apply to the present case. The court emphasized that allowing the deduction would give an unfair advantage to those not fulfilling their statutory obligations.

Issue 3: Applicability of Section 80V for the Assessment Year 1972-73

The court noted that section 80V, which permits the deduction of interest on money borrowed to pay tax, was inserted by the Taxation Laws (Amendment) Act, 1975, effective from April 1, 1976. Therefore, it was not applicable to the assessment year 1972-73.

Conclusion:

The court concluded that interest paid due to delay in payment of tax is part and parcel of the liability to pay income-tax and is not a permissible deduction under section 37 of the Income-tax Act. The interest takes the color of the original tax liability and arises from the assessee's failure to fulfill statutory obligations. Consequently, the court answered the question in the affirmative, in favor of the Department and against the assessee, leaving the parties to bear their own costs.